Outer-Limit Contracts and Unfair Dismissal

Written by Martin Reid on 10 May 2018.

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A Full Bench of the Fair Work Commission in Saeid Khayam v Navitas English Pty Ltd t/a Navitas English [2017] FWCFB 5162 (Navitas) has recently re-set the legal principles which govern outer-limit contracts in the context of unfair dismissal.

While it has traditionally been thought that employees on outer-limit contracts were unable to make an unfair dismissal claim on the expiry of such a contract, this decision has cast doubt on the soundness of this position and opened employers up to the possibility of having an unfair dismissal claim brought against them when an employee’s outer limit expires.

An outer-limit contract (also commonly referred to as a “maximum term” contract) is an employment contract, which includes a nominated expiry date and provides the parties to the contract with the option to terminate on notice without the need to establish a breach. Such contracts differ slightly from “fixed-term” contracts in that they allow the parties to terminate before the end of the term.

The protection afforded by outer-limit contracts has traditionally made them attractive to employers (particularly those who employ supported by external factors such as funding), but, in recent times, the security afforded by such contracts has been brought into question.

Pursuant to s.386(1) of the Fair Work Act 2009, a person is dismissed if “the person’s employment…[is] terminated at the employer’s initiative”.

Traditionally, the expiry of an outer-limit contract at its nominated date meant the unfair dismissal jurisdiction of the Fair Work Commission did not come into operation because the termination of such a contract resulted from the effluxion of time rather than “at the initiative of the employer”: Department of Justice v Lunn PR974185 (Lunn).

In Lunn, the applicant employee had been employed by the employer pursuant to a series of outer-limit contracts. Two weeks before the end of the final contract, the employer terminated and provided “payment in lieu of notice”. The issue then arose as to whether the termination had occurred by the expiration of time or at the initiative of the employer.

In making its decision, the Full Bench of the then Australian Industrial Relations Commission observed that almost all employees had been engaged on temporary contracts with the expectation that they would be renewed. In this regard, the Full Bench stated:

… “employers are entitled to structure their affairs, including the contracts they offer to employees, in the way that they best think suits their interests. Moreover, even if it was shown the purpose of the policy (that is, to employ people through outer-limit contracts) was to avoid the Commissioner’s unfair dismissal jurisdiction… this would still not render such contracts a “sham” in a sense that, viewed objectively, the parties to those contracts had a common intention that they would not create binding legal rights and obligations according to their terms.”

The Full Bench concluded that (despite the fact that the outer-limit contracts were used predominantly to avoid the unfair dismissal jurisdiction), the employment had terminated as a result of the expiry of the last contract and not at the initiative of the employer. This long-held position has been brought into question by Navitas.

Navitas concerned an employee who had been employed on a series of outer-limit contracts over a period of four years. At the conclusion of the final contract, the employer decided not to offer the employee a further contract relying on the Lunn principle. The employee made an application to the Commission on the basis his employment had been terminated at the initiative of the employer.

Initially, (despite considering a series of other recent cases which brought into question the adequacy of the Lunn principle) the Fair Work Commission thought itself to be bound by Lunn and concluded that there had been no dismissal at the initiative of the employer.

The employee appealed against the Commission’s original decision that followed the Lunn principle.

The Full Bench agreed confirming the correct approach for determining whether the expiry of an outer-limit contract was a “dismissal” was determined by reference to the employment relationship, not merely the terms of the final outer-limit contract and that in making such a determination, the following factors should be taken into account:

Whether an action on the part of the employer was the principal contributing factor which resulted in the termination of the employment;

Whether the terms of the contract reflect a genuine agreement on the part of the employer and the employee that the employment relationship will not continue after a specified date;

Whether the contract is contrary to public policy in that it has the purpose of frustrating the operation of the Fair Work Act 2009 or preventing access to the unfair dismissal jurisdiction;

Whether the use of outer-limit contracts was appropriate in the relevant field of employment;

Whether the outer-limit contract is one of a series of contracts which operated as a matter of administrative convenience;

Whether the employee had an expectation of ongoing employment;

Whether the terms of the contract are inconsistent with the terms of an award or enterprise agreement which prohibit or regulate fixed term employment (in which case the terms of the industrial instrument will prevail over the contract); and

Whether there were any oral or written agreements that may have varied the original contract to the extent that the time limit no longer applies.

Following Navitas, it is only when the terms of an outer limit contract reflect a genuine agreement that the employment relationship (as opposed to a particular contract of employment) will not continue after a specified date that the passage of time will effect the ending of the employment relationship.

If there is no genuine agreement, a failure by an employer to offer a further contract simply becomes one factor that is considered (among others) by the Commission in deciding whether the employer performed any action that was the principal contributing factor in terminating the employee’s employment.

Navitas has made the treatment of outer-limit contracts in the context of unfair dismissal less certain. The expiry of an outer-limit contract, of itself, is no longer decisive in terms of unfair dismissal and employers are no longer able to just assume that the non-renewal of an expired contract will avoid scrutiny by the Commission.

In this regard, employers need to review their current employment practices and put in place strategies for ending outer-limit contracts so as to avoid exposure to unfair dismissal laws. This means that conversations with employees when negotiating an outer-limit contract and deciding not to offer a new contract upon expiry will become critical.

Further, if outer-limit contracts are to be relied upon to defeat an unfair dismissal claim, an employer will also need to rely on logical business reasons associated with their use (as opposed to a desire to avoid unfair dismissal claims).

Martin Reid is the Managing Principal of Coulter Roache and Head of Litigation & Dispute Resolution